Flush with cash, Canada banks poised for expansion, takeovers

Bloomberg

Canadian banks have amassed their biggest war chest in five years — and they’re ready to use it. The country’s six largest lenders are approaching their strongest capital position since 2013, leaving them with enough resources to pursue acquisitions, buy back shares or build from within. That has the chiefs of Canada’s big banks weighing options.
“It’s great to have this capital flexibility,” Royal Bank of Canada Chief Executive Officer David McKay told reporters last week after the country’s largest lender held its annual meeting in Toronto. “We’ll continue to return capital, we’ll continue to grow and we have flexibility with our strong capital ratios to make an acquisition if necessary.”
The average of the banks’ common equity Tier 1 Capital ratio, a measure of financial strength, stands at 11 percent and would be 11.4 percent after adjusting for capital requirement revisions made this year by Canada’s bank regulator. That’s up from 9 percent in 2013 and the strongest since Canada adopted the latest global standards put in place since the financial crisis in 2008.
Canada’s Office of the Superintendent of Financial Institutions requires a minimum 8 percent CET1 ratio for the six large banks. The ratio is calculated by dividing a bank’s highest quality capital by its risk-weighted assets. Canadian lenders have an advantage over the largest US banks, which boast higher regulatory capital stre-ngth but also face additional constraints from US regulators that cri- mp their flexibility in using capital.

CREDIT CARDS
The banks are estimated to have C$14 billion ($11 billion) of excess capital, with Toronto-Dominion Bank holding the biggest coffer at C$5.8 billion, according to Sumit Malhotra, a bank analyst at Scotia Capital. Bank of Montreal has C$3 billion followed by Royal Bank at C$2.1 billion, while Bank of Nova Scotia and Canadian Imperial Bank of Commerce each have C$1 billion of excess capital, he said.
“Toronto-Dominion CEO Bharat Masrani, 61, said on the bank’s first-quarter earnings call he’d consider more credit-card deals such as those struck in the past six years with US retailers Target Corp. and Nordstrom Inc., while US bank takeovers along the Eastern Seaboard and southeast are “particularly attractive.”

ACQUISITIONS CHALLENGING
Royal Bank’s McKay, 54, said acquisitions are challenging given assets are “very expensive” and options within Canada are “limited.” Still, he’s interested in building on the 2015 takeover of City National, Hollywood’s “bank to the stars,” to further US expansion in commercial and private banking.
Scotiabank has already taken advantage of its strength by pursuing three acquisitions since November, including its February agreement to buy Canadian money manager Jarislowsky Fraser Ltd. for C$950 million and its deal to buy Banco Bilbao Vizcaya Argentaria SA’s 68 percent stake in a Chilean lender for $2.2 billion.
“We like the optionality of a higher capital level,” CEO Brian Porter, 60, said April 10, adding that acquisitions are “part of our strategy, and always have been.”
The heads of Bank of Montreal and CIBC, the country’s fourth and fifth biggest banks respectively, are putting spending on internal initiatives ahead of acquisitions. CIBC last year bought Chicago-based PrivateBank for $5 billion, the largest takeover in CIBC’s 150-year history.
Bank of Montreal, which also operates in the US Midwest with its Chicago-based BMO Harris Bank, isn’t interested in going “geographically far afield,” CEO Darryl White 46, said at the bank’s April 5 annual meeting. “But anything within those business lines and those geographies is interesting to us.”
More share buybacks by the banks may also be on the horizon —and could be a sop for investors who’ve seen Canadian bank shares trail their US counterparts. The eight-company S&P/TSX Commercial Banks Index has risen 1 percent in the past 12 months compared with an 18 percent advance for the 24-company KBW Bank Index of US lenders.